Signing a noncompete agreement can potentially provide some assurance that former employees will not start up or join the competing business across the street. In the absence of a noncompete agreement, employers often try to rely on their former employees’ fiduciary duties to combat competition. Unfortunately, Alberta’s Court of Appeal has recently confirmed, in KOS Oilfield Transportation Ltd. V. Mitchell, that common-law fiduciary duties do not generally prevent former employees from working for a competitor.
In April 2010, three employees of KOS Oilfield Transportation Ltd. (KOS) left the company to work for a competing start-up, ATK Oilfield Transportation Inc. (ATK). All three employees had signed confidentiality and nondisclosure agreements with KOS that prohibited divulging confidential information during and after employment, required the return of any property and confidential information upon termination, and prohibited solicitation during and after termination.
In early June 2010, KOS applied for an interim injunction against the three employees. KOS argued that the employees were key management staff that had been targeted by ATK because of their access to confidential information. KOS also produced evidence showing that two of the employees were purposefully collecting confidential information at KOS in preparation for their move to ATK.
The injunction order was granted on broad terms that prohibited the three from working for their new employer, required the return of confidential information, and required disclosure of all contacts made with customers and former customers of KOS. After the ex-employees tried to get a chambers judge to vacate the injunction, the matter ended up before the Alberta Court of Appeal.
In making its decision, the Court of Appeal relied on KRG Insurance Brokers (Western) Inc. v. Shafron, which said that a reasonable duration and territorial limits must be present for a noncompete agreement to be enforceable.
The Court of Appeal also disagreed with KOS’ reliance on common-law fiduciary duties as preventing former employees from engaging in competition without the presence of a noncompete agreement. Taking the principle from R.J.V. Gas Field Services Ltd. V. Baxandall, the Court of Appeal said if fiduciary obligations arise for these employees, they do not prevent competition but merely preclude solicitation of specific customers for a reasonable period of time.
Having concluded that common-law fiduciary duties cannot prevent employees from accepting employment with a competitor, the Court of Appeal vacated that part of the injunction for all three employees, allowing them to continue working for ATK.
With respect to the remainder of the injunction, the Court of Appeal made variations. It vacated the injunction entirely for the one administrative employee (who the court said owed no fiduciary duties) and varied it for the two management employees.
While the Court of Appeal questioned the existence and extent of fiduciary duties as well as the validity of the confidentiality agreements given their lack of any duration or territorial limits, it accepted the restraint against using or disclosing confidential information. It also maintained preservation orders preventing the destruction of documents, records, and confidential information — because of the “surreptitious” behaviour of the three in collecting confidential information for later use in their new employment with ATK.
Lessons for Employers
This case is another in a long line that illustrates the courts’ general aversion to limiting competition. Prudent employers should not rely on fiduciary obligations to prevent competition by a former employee. Instead, prepare a noncompete agreement. And even that will only be of assistance if it’s properly drafted and reasonable.